A Brief History of The Legality and Legitimacy of Pre-Settlement Funding

As a relatively new practice in the United States, pre-settlement funding (otherwise known as legal funding or legal financing) has left many plaintiffs wondering whether they should take advantage of it or not.

This recent development has also affected attorneys throughout the country who wonder about the ethics and legitimacy of this widely unregulated business.

While it may be pretty new to America, it’s not quite as novel to other parts of the world.

So how did it make its way to America? And what does it mean for the law system?

Here’s a brief history of legal financing in the United States.

How New Is It?

The answer? Not very.

Third-party funding has been around for centuries. It has its roots in champerty and maintenance – two practices long deemed illegal in England until 1967.

Maintenance occurs when an unaffiliated third-party interferes with and maintains litigation by providing assistance, most commonly financial. Champerty is a type of maintenance, in which the third-party offers financial aid in return for a share of the settlement.

These practices were banned because many corrupt officials in medieval England would provide assistance to plaintiffs in order to strengthen their fraudulent claims. Then they would share in the profits.

Because legal financing has so much in common with maintenance and champerty, many people are worried about the legality of it.

But the modern version sometimes makes it seem like an entirely new practice.

Modern legal funding in the United States has been around since 1997. Where it differs from maintenance and champerty is that the lender often doesn’t have an active role in the lawsuit.

This prevents the unnecessary prolongation of lawsuits in order to fit the interests of the lender.

Nowadays, lenders will not provide assistance unless they first get in contact with the plaintiff’s attorney. In fact, lenders won’t approve applications for support unless you have already hired an attorney. If you’re facing bankruptcy, it may be even tougher to be approved for lawsuit funding. In which case, first, speak with a bankruptcy attorney on how to approach your specific situation as finances on all fronts are what they specialize in.

This allows the lender and the attorney to generate shared goals and operate in the interest of their client, protecting them from manipulation and lender interference.

Is it Legal?

Despite the modern version of legal financing breaking away from the mold of champerty and maintenance, many still wonder if it is legal.

The short answer? Yes, it is.

Both champerty and maintenance were legalized in England in the 1960s. In the United States, it’s a mixed bag.

At the national level, maintenance and champerty have never been regulated. Across the country, many states have never regulated it either. For the states that do, regulations typically allow it.

The interesting thing is – many legal financers want to be regulated. To them, it’s the quickest way to prove their legitimacy.

And it’s an ever-expanding market. From 2012 to 2018, the use of legal financing by law firms grew by more than 200%.

Law firms’ willingness to work with financial lenders seems to indicate a legitimate and respectable business practice.

And if its success is any indication, lawsuit financing is here to stay.

Should I use it?

The decision to apply for legal financing is a personal one. Some cases don’t even qualify for pre-settlement funding.

For the right person, legal financing can make all of the difference. For the wrong person, it’ll just cost you money.

Before you apply, you should discuss it with your lawyer and look at all of your options. 

If you have more questions about legal financing, or you’re unsure how to proceed with your suit, don’t hesitate to reach out to our attorneys.